Abstract
This article discusses the federal income tax consequences of a buyer's assumption of contingent liabilities in a taxable sale of the assets of a trade or business. Although judicial precedent remains scarce, several articles written over the past few years have considered this issue. Nevertheless, the matter remains unsettled both as to the theoretically correct result and, perhaps, more importantly, as to what is required to achieve a workable solution.
Since the Treasury apparently considers the treatment of contingent liabilities to be ripe for a regulation project, my hope here is to clarify the issues and to present the options in a comprehensive and orderly manner so as to facilitate a decision. Although I do not describe current law in detail, I indicate where the possible approaches might differ from existing precedent and, therefore, to what extent it might be necessary to seek legislation A solution is made more difficult, in some circumstances, by the reintroduction of a substantial difference between the rates applicable to ordinary income and capital gains.
An appreciation of the issue's ramifications requires a sophisticated understanding of the impact of what has been referred to as the "time value of money,'' including the role of "matching" of income and deductions (to compensate for an error in the treatment of one of the parties) and the fact that changing the timing of income inclusions or deductions need not affect the value of the item if interest and tax rates do not change.
I hope to show that the approach of ignoring contingent liabilities, which is advanced by some and is described in Part V, is more generous than its supporters might appreciate and that the difficulties and potential for abuse inherent in taking account of contingent liabilities, while significant, are not as great as some might fear. These conclusions derive from my belief that the present value of contingent liabilities is appropriately measured by discounting the expected payments at an after-tax rate of interest. A main goal of this article is to convince readers that this is correct.
Recommended Citation
Daniel Halperin,
Assumption of Contingent Liabilities on Sale of a Business,
2 Fla. Tax Rev.
(1995).
Available at: https://scholarship.law.ufl.edu/ftr/vol2/iss1/15